Q3 2019 Earnings Call
Ladies and jumped today's conference scheduled to begin shortly please continue to standby. Thank you for your patience.
Yeah.
[noise], ladies and gentlemen, thank you were standing by a lock up to the precision drilling Corporation 2019 third quarter results conference call them web cast.
At this time <unk>.
After the speakers presentation that would be a question and answer session to ask the question during the fashion you when you depressed star one on your telephone.
Please me about today's conference call is being recorded.
If you acquire any further system Sars zero.
But now like to hand, the conference, which you speaker today.
Manager Investor Relations. Thank you. Please go ahead Sir.
Thank you Valerie you good afternoon, everyone welcome to precision Drilling's third quarter 2019 Rings conference call and webcast participating today on the call with me for Kevin nephew, President and Chief Executive Officer carry forward Senior Vice President and Chief Financial Officer, <unk> cheating Technology Officer.
Through a news release earlier today precision report is third quarter 2019 results.
Please note. These financial figures are in Canadian dollars, unless otherwise indicated silver comments today will refer to non I oppressed financial measures such as you been operating earnings.
See our news release for additional disclosure on these financial measures.
Or comments today will include forward looking statements regarding precisions future results and prospects caution you've got these forward looking statements are subject to a number of risks uncertainties that could cause actual results to defer materially from our expectations.
See or news release in other regulatory filings for more information on forward looking statements needs rest factors.
Kevin will be getting dates call with opening comments carry will then discuss or third quarter financial results followed by Kevin's operational updating outlook. Additionally, chewable comment on precision technology strategy in progress on key initiatives to date.
With that I'll turn it over to you cabin.
Thank you Dustin good afternoon.
So the port Curiae provides or a third quarter potential update.
Make a couple little opening comments.
First off I am pleased with our strong third quarter potential not pretty results, we will have much worse than that few moments.
But I'm also sure. The every one of those cold today recognizes doesn't duster interest nor sector is an all time low.
Macro economic concerns political uncertainty and eat capital exhaustion contributing to this loss of industry sort of sector.
Isn't share price, it's not matter effectively you tar industry is hovering near multi indicate lows.
This is deeply troubling for investors for a management team and for our board.
You can't imagine a frustrated I am it was an investor as a director it does the senior executive.
Well the shirt price is disappointing these micro challenges are not nude the position organization.
Precision was founded the jumps up the 19 eighties drilling recession, similar time period characterized by political uncertainty.
Macroeconomic concerns and weak weak demand.
Precision business systems that are processes affirms competitive strategy in core competencies were developed built to create value that troubling sure.
Those systems and processes, the mindset of our people, but the refined do a bird numerous cycles over the last three decades remained the court <unk>.
And <unk> or just now with just stick to the second help slow down Oh deeply experience team was the manager a business and the constrained mode. Since November 2014.
We continue to manage optimize every business owner within our control.
And the results have been a remarkable.
<unk> you'd be like growth.
G.N.A. cost reductions strong cash management strung operating cash flows I'm debt reduction of only helpline.
We are returning capital to shareholders, we achieved record market shares an old geography is we have first mover status on drilling automation technology.
So yes, while we were deeply frustrated the share price.
I know those before strategy.
<unk>.
Strong results will follow the sure price respond to reflect the true value per se isn't going.
So now carry over to you to replace on the third quarter.
Thank you Kevin in addition to review in the third quarter results, how right an update on 2900 capital planning management of our capital structure.
Precision strong 2019 financial performance continued in the third quarter with adjusted EBITDA $98 million, 21% higher than the third quarter 2018.
The increase in adjusted to the Doctor last year as primarily the result, pyrex international activity levels higher <unk>.
<unk> costs and benefits from non retrain items.
Set by lower North American drilling activity.
<unk> the quarter benefited from the impact I, oppress, 16, and lower Sharebased incentive compensation.
In the quarter, we recognize the 2 million dollar sharebased compensation expense compared to $8 million and Q3 of 2018.
In the U.S.
D. for precision decrease 6% from Q3 2018, while margins were up 1357 U.S. dollars per day.
Oh really impacted by hired gay rates parsley upset by higher operating costs.
Sequentially.
Some margins net up turnkey, an I.B.C. decreased 218, U.S. dollars and increased 106 U.S. dollars respectively.
We expect margins to be down for two 400 to 800 U.S. dollars per day and the fourth quarter.
In Canada drilling activity for precision increased 20% decrease 20 per cent Q3, 2018, well margins were down $702 per day from the prior year.
Shortfall payments margins would lower by $688 per day.
Margins were negatively impacted by fixed costs spread across lower activity levels and the time in a certification costs.
Last quarter give guidance for Q3 margins to be down 252, $750 per day, you're every year and we expect a similar year over year trajectory and Q4 .
Internationally drilling activity for precision was 12% higher than Q3 2018.
International average <unk> up 1226, U.S. dollars as a result, <unk> re contracting rigs at higher rates and the startup of our six Kuwait, new build Reagan the beginning of the quarter.
In our C.M.P. division adjusted deep into this quarter was $4.6 million essentially flat with the probably a year. Despite a 15% decrease in revenue.
Increasing profit margin is a direct result, a business improvement initiatives enacted over the past several quarters and improved while service pricing.
Note.
Here today C.M.P. adjusted EBITDA $18 million is more than double the the dog at the same period and 2018.
Capital expenditures for the quarter for the Corporation, we're $24 million.
For 2019.
Or capital plan is $144 million and the plan is comprised of 31 million for sustaining infrastructure and 113 million for upgrading expansion.
Capital expenditure plan has been front end loaded as we deliver to U.S., new build rig early and Q1, an s. yard A.C.S.T. 1500 conversion delivered in a second quarter.
In the six new build rig delivered to quit.
Expect capital expenditures for the remainder of the year to primarily consisted of maintenance expenditures.
Or capital expenditure guidance for 2020 remains $60 million to $80 million and is expected to be primarily comprised of maintenance upgrade capital expenditures.
We have continued to build our contract book signing six term contracts during the quarter and as of October 23rd We had an average at 55 contracts and and for the fourth quarter, an average of 29 contracts for the full year 2020.
As of September 30th 2019, or long term deposition net up cash is $1.4 million.
He had $94 million a cash in the balance sheet or a total liquidity position was approximately $800 million.
During the nine months I'm 2019, we've made open market purchases totally U.S. $59 million.
And your today have called U.S. $50 million abroad. Standing 2021 notes are you to date 2019 debt reduction total $146 million.
And the third quarter.
The G.S.X. approved our application to met implement a normal course issue a bid and that's it today, we have purchasing cancelled approximately three per cent of her outstanding shares using approximately $12 million from cash.
We continue to place the highest priority on debt reduction at the best Avenue for creating shareholder value and will only continue to share repurchase plan. If we are meeting or debt reduction targets.
For 2019, we plan to meet or exceed or 200 million dollar debt reduction target for 2020, we plan to reduce reduce debt by 100 million to $150 million.
As of September 30th.
A ratio of net debt to trailing 12 month <unk> sits at 3.4 times and we continue to work.
Toward our longer term target ratio of two times.
Or average cash interest costs is 6.7% and with the 2019 targeted debt reduction we expect runrate interest expense will be just under $100 million to exit the year, assuming today's U.S. dollars Canadian dollar exchange rate.
Our earliest step maturity is $116 million do December 2021, and we expect to retire these notes with cash before the end of 2020.
The next step maturity is not due until December 2023.
For 29 team, we expect depreciation be approximately $330 million as she needs to be.
Under $100 million prior to Sharebased compensate compensation expense.
This guidance is down from guidance of $110 million that we provided earlier and 2019.
The result.
The reduction in S. do you need guidance is the result of aggressive cost management are fixed cost.
We would expect cash taxes to remain low and are effective tax rate to be in the 20% to 25% range for the year.
<unk> now trying to call back over to Kevin for further discussion of the business.
[noise]. Thank you Gary.
Oh begin with an update our technology initiatives.
As we mentioned on her press release during the third quarter, we achieved a step change and customer acceptance of R.P.C. pack automation technology.
In a moment altering the call over to choose <unk> precision is cheap technology officer to provide a detailed updated.
But first my prior Technol jumped age we've been discussing feel local resistance to change as a primary obstacle.
I believe we reached a tipping point acceptance <unk> resistance is quickly transitioning to active field support.
To quote for drawing engineer on a recent multi won't <unk> pack.
Automation, how significantly approved you operational performance when safety for the organization. It has consistently delivered top cortiles connection performance, we were always scratching the surface of the systems future capabilities.
So I'm hearing more and more of these customer testimonials. Those we can do on this topic commercialization.
By the end of this month precision and we'll have drilled 1000 wells utilizing process automation controls.
The efficiency gains on the cost savings for our customers are becoming inarguable.
<unk> please sure your thoughts Doorbusters.
Thank you got in and good afternoon.
Last time I spoke with you. It wasn't you got to go and I must say, we along the dog cartoons have known locked indeed.
Looking back to I pod key learning.
One the best way to improve Jennings, but for me, it's using the ingenuity off our backs. Good supported by these 92 sites and replicating it with consistency off precision packed system.
Secondly.
Aren't deletions talks to deliver <unk> customer value when system, you Tonight <unk>.
80%.
Q3 was that tipping point what position.
We now have every one of these axes to well above that essentially and actually most of them I was running consistently about 90% utilization.
<unk> every single sequence, we have automated so fun <unk>, 25% to 35% performance improvement.
Sending reduction in cost put on customers.
We have to systematically applied all of these and many other things to lot pack. So they deliver due process and that that isn't in Q.T.V. double the number of odd pack the customers.
You can imagine in this environment, where everybody is highly scrutinized. This is a great testament to the value of the system.
Value. These systems are delivered into our customers.
One thing push on the adoption <unk> no. That's weak line, we had customers who experimented with shutting down the system would one section one land even multiple let us do validated deep apartments game in every single one of them is back to fully you Tonight in the system.
The last few <unk> made a point to see as many decisions customers as possible.
In the other drives to load it cost and industrialized performance.
Two major.
One.
<unk>.
Reliance on real time data to make decisions is maturing very quickly.
And that is that huge appetite fun high fidelity data and value in real time insights. This synchronize <unk> data analytics initiate too will be sending a lot more time and it's in the company or.
Secondly, there's no shortage also they card rather than best practices.
He had challenges.
<unk>.
In my opinion mood and move on but agent realizing that most efficient pots to this put formants consistency you to process automation interim.
Let me give you a really good example on delivering this type of put 40 minutes consistency.
<unk> <unk> <unk> <unk> customers, who is heavy use it decisions back systems mobilized code pack unable to drink from another bayes and you set up using one of the little <unk>.
Since day, one by leveraging X. system. This <unk> Act spot you best put forth eggs in the food.
With quite literally.
Replied.
I believe we now have quite successfully cross the <unk>.
Platform hyper link field by Andrew quite digital competencies <unk> focused on expanding because I'm scoop up automated activities. This is where absolutely <unk> and we currently have 15 different ads in various stages, they'll feel me and commercialization.
I'm highly confident that positions technology strategy is perfectly aligned.
<unk> those improving letting construction quality in cost.
In this capital constrained and vitamins, we have the ideal solution for our customers.
All I will have to call back to Kevin.
Thank you shoes you.
So I'll remind but listeners the we see our automation technology as a key element of <unk>.
We believe park will drive drawing rig market sure gains more enhancing our revenue margin growth as we continue to rural district Golgi across are highly standardized super Triple <unk>.
It's about turning to our regional update I'll be able to domestic United States.
We're currently or activities in the mid sixties down a handful of rigs <unk> reported in July .
Wow. This is slightly lower than we expected what are we provide guidance our second quarter call. It should not be a surprise and let the subdued customer tone around cashflow management budget exhaustion.
We expect a recount arranged in the water mid sixties for the balance of the year.
How's our customers reload spending 2020 budgets, we have several projected brignac divisions. The may left activity to low seventies early next year.
No I also know there's a lot of concern an interest around leading edge rates and pricing.
So since the end of the second quarter. We included date term, calling trucks, which includes to this month.
For the precision S.T. 1500 rigs those rates were were and remain in the mid twenties.
The smaller precision S.T. 1200 rigs the rates are a little lower in the 20000 dollar per day ranch.
Turning to precision as well dwell rigs most of the rigs that don't have locked in contract pricing remains in the low twenties for precision F.T. 15, hundreds and the high change for precision S.T. 12 hundreds.
It was real occur on the market, the Permian D.J. <unk> or precision strongest regions, where we have 51 octave rigs today.
Are weakest regions or the scoop stuck in the Balkans with one octave <unk> each.
The balance of activity is in Texas, Louisiana spread between the hands Bill Eagleford in Gulf Coast areas with 12 rooms running.
Looking forward, we believe contract activity constructing activity and rate realization will improve quickly what our budget or customers finalize begin to execute there were 2020 building joint budgets.
We do expect intensified customer focused on the efficiency technology Wrecking crew performance.
We also know through our customers are planning to smooth the joint projects over the course of the year and this is also intended to drive efficiency by reducing stop start costs.
This aligns very well with the capabilities up Recisions Super Triple Pat rigs improving performance of our cruise.
<unk> see games achievable precision <unk> automation technologies.
Turn into Canada, the political and regulatory uncertainty created a high sense of anxiety for many.
For precision or scale and our strong market positioning remains aren't key differentiate or.
Or Canadian market share for most of the third quarter was sitting in the 30% range.
Due to our large sheriff super Triple powdered wigs and the operational excellence are skilled recruit a real personal deliver.
Today, we have 52 rigs running it's a peak for the fall 2019 season with slightly over 30% market sure.
<unk> are rigged mix remained strong or 20 222 of our Super triples, currently drilling on pads targeting natural gas liquids points out, but this <unk> drilling program. It was a key.
Stable wedge of business for precision.
[noise] looking forward in Canada, we expected Precisions winter 2020 activity levels will be a line with 2019 picking a low to mid sixties.
<unk> remains from for our Super tripled <unk>.
Rigs are largely committed for the winter season, and we expect day rates.
Would be generally in line with 219.
Are <unk> automation systems are on track to a cheap one commercialization further enhancing the rubber rubber new opportunity and competitive advantage for those risks.
There are heavy or else segment precision Super single rigs have a strong market position, we expect winter 2020 activity in price. It will also be a lot of 2019.
However, pricing pressure were made intense on the <unk> the cardium the biking, social scouts run balking regions.
<unk> Super single rigs will continue to be competitive of use areas, we do expect pricing pressure to be intense.
[noise], so turning back to the issues impacting Canadian drilling activity.
We firmly believe but the Alberta government must act immediately removed the production curtailments entirely for all conventional oil producers.
We take this as a critically important step for our customers it should lead to stronger utilization importantly jobs in the services industry.
<unk> urgency of this request cannot be overstated those our customers are now in the throes aponte per 2020 the time to act as no.
I'm also encouraged by the federal government's postelection reaffirmation commitment to proceed with the transmit and pipeline expansion. This is certainly that purging stance following the he'd was election.
Both of these regulatory actions would prove constructive catalysts, where our energy industry activity was certainly encourage investment <unk>.
Absolutely encourage the government Roberta act on the <unk> reduction and the federal government to proceed transmit them.
So turning toward international operations Curry mentioned things are progressing nicely with the six rigging Kuwait operating for the fourth quarter.
We've achieved our desire to desired skill the Gulf region, and this will allow us to continue to grow top one and bottom line with middle fixed cost impacts.
Currently we are seeing increase bidding activity in Kuwait, Saudi Arabia, Kurdistan, even Latin America.
Some of these maybe opportunities to activate or I don't know rigs in the region and others may involve deploying idle north American rigs.
We expect developments are these tenders later this year or early 2020 as the national oil companies transition into 2020 budget spend on.
Moving to Precisions completion and production group. They continued the strong operating financial momentum we reported earlier this year.
I want a couple hundred team for the excellent execution during the quarter.
But from a Canadian perspective, the industry's marketable replete will continue to suffer attrition as the current market rates not support economic reinvestment the offsets the wall service industry remains very challenged.
This is a business where scale matters precision we were made in the very strong position.
So is ready back toward uses a free cash flow jury mentioned, our debt reduction in capital spending for 2020.
Oh reiterate juries comments the debt reduction will be our top priority.
Maintenance capital will be adjusted to match activity levels and other uses of cash.
Expansion and upgrade capital and share buybacks will reign discretionary will be prioritize behind definitely payment.
There was no doubt the debt reduction will create your older value and this will each was significantly approved share price.
With a relatively new and standardized sweet Super Triple rigs enhanced with pack or intense focus on cost control.
Tends to focus on cash management, we fully expect to meet or exceed our short term long term debt reduction targets as we have over the past several years.
So close out by taking the precision employees for the hard work and a strong results. They delivered during the third quarter well now turn the call back to the operator for questions.
Thank you <unk> when you depress star one on your telephone.
The question please press the pound key.
Please.
<unk>.
Our first question <unk> <unk> <unk> RBC aligned herself.
Hey, good afternoon.
<unk>.
Hey, appreciate a appreciate that summary, very very insightful dynamics hair. So I want a circle back with you Kevin and a couple things you mentioned the first was in the context of you know the pricing dynamics in the in the U.S. and you kind of gave the varying ranges of your different kind of ray classes, and just just want to do kind of be.
Certain I'm not gonna understanding the dynamics to play. So you indicated that that's her pricing currently is he didn't really kind of reference that there's any significant pricing pressure in in sharp contrast, and what you said about the shallow assets up in Canada. So <unk>. So I just want to make sure I understand where are you, saying there is pricing pressure in the U.S. or price.
Is fairly stable.
You know I think we as a question right now is there's certainly some pricing pressure in the U.S. It applies more to the welder well rigs and any you know very remote new opportunities that the pop up on the rigs that are renewals I think we're working closely with customers on those renewal.
<unk> kind of in line with previous quarters.
Okay, great appreciate that color.
Follow up <unk>.
<unk> comment on that point, we need to see which it's easy to see high level of oppressing discipline. Among the multi basin U.S. drillers and you know it speaks to the still relative tightness of supply of the you know super spec or in our case you were triple rigs.
You know utilization has has softened up a little bit, but it's still on the upper eighties across the industry and certainly for us. It's in the upper eighties and that is not a loose pricing market, that's actually a price type type pricing market type pricing market and.
She continued discipline among the drillers with those rich.
Yeah appreciate that adding color well the thing on a day also follow up on because you you kind of made it a a very important part of your strategy going forward is you know the the automation in the apps and and the software and so on I think last quarter. You indicated that you felt confident about the perspective, you know incremental revenue generation and revenue.
Per day generation, so with another quarter behind us and and with what you see in the pipeline. You know can you give us an update on what's your how're you see the revenue model evolving and what kind of revenue generation you think it can provide.
<unk> answer that question by telling you the our goal for the year was to be commercial fully commercial which really means we're being paid for every system and <unk> hurting you expect returns by the end of the year, we we didn't make that claim on this call.
But expects from news from us shortly on that okay.
And then we'll provide a kind of forward looking guidance, we'll talk more about the next steps in the technology and I think.
I think we'll we'll be able to provide concrete details or where the technologies out today and what's going.
Hi, Kevin.
Tell you that we are very close to were very encouraged and we're happy with where.
That's great. Thanks, Kevin.
Great. Thank you for.
Our next question comes from James.
Okay.
<unk>.
Hey, Jay James area Yeah.
A duck Kevin you you mentioned you know you thought your U.S. recount in the low sixties could go to the maybe the low seventies here is budgets are reloaded or you having that is that it kind of a gut call or are you. Having you know that number of conversations are active dialogues that suggests that that's you know it's something that's more like.
Could happen.
<unk> ultimately we didn't confirmed that we have signed contracts to take us never because there's still a lot of moving pieces.
Not many of our clients have announced or 2020 budgets, you up and I think they're still.
You know take their to get through these two three conference calls and see all the market <unk> they'll decide about 2020 spending but there's all we have a high degree ongoing conversations with customers and the multiple in a number of basins number of opportunities.
A lot of anticipation right now round or talk automation controls.
So so short.
You know some further just location or uncertainty in the marketplace I think we'll see the recount a industry wide move up a little bit I think will benefit well and we'll gain some market share again, no driven by technology and efficiency.
Okay got it and then on the on the pack automation controls <unk> doesn't number was a double of customers, maybe a number of systems a quarter of a quarter and being driven by the the the field now you know what do you think spurred this this change this.
Resistance to to swim or switch from being resistance to uphold from the field level.
You know on chooses comments earlier, he commented that 70%, it's a bit of a break even for customers.
You know we crossed over the threshold on every single rig during the quarter in fact, she's or commented that most of the roads are running over 90% I can tell you, though that level, they're making money on this and it's clear and it's apparent.
And and you know the the the field the field is getting young and it's moving forward.
Also talked about some rigs where they would turn it off for a section of the well or for a well those decisions were being made up the field.
Okay, and that's turned for US now so we feel quite good about our positioning and it's it's moving forward well the technology is an arguable works and <unk>.
Okay, good to hear that Kevin.
Thank you.
Thank you My next question conference on me.
Okay.
Thanks, guys.
[noise] shot.
So Kevin in Canada, you're calling her flatish activity in pricing.
Hi, specs Super triples, you know, it's pretty consolidated market and where historically pretty low levels of activity. Just I was curious if you could walk us through what you were perceived to be the flex points.
That could cause a significant deviation from that level in either direction.
Huh.
Ah screwed question really good question I wouldn't say capital markets reaction too cute predisposure by you and be companies could have an impact.
You know if for whatever reason the capital markets a sour on the further on the M.P. companies on Q. tree that could be.
Could be a negative driver an activity.
If our customers continue to show good efficiency and continue we're turning value to shareholders I think that supports into a more positive views. So I think it really does depend on.
How good our customers are delivering efficiency with their capital and showing their investors that can return capital.
Got it and I appreciate that feedback and then obviously, obviously did not you know macro Benskin go either direction you know if if for whatever reason W.T.I. price firms up into the high fifties or sixties, that's very positive.
If.
If we see you know production of botany or declining in the Caribbean with the we're just activity. That's a positive <unk>, there's things are going to happen.
But on the edge can make a big difference for demand for Super Triple risks.
Right.
That's that's fair.
And the U.S. Yeah, one of the large service companies indicated a desire to become more asset light in North America.
Historically, you've had to construct a partnership and product lines like directional drilling with the same service company.
Have you seen much of a shift in terms of.
Go to market strategy, there and and does that create opportunities for you can we just explore a little bit about how that could to unfold over time.
In fact precision.
Yeah, Shaun I would say that the success, we're having a automation right. Now is is gathering attention from the integrated service companies in general.
And I think they will view our platform for technology delivery as a favorable platform. So I think that may create some opportunities, but you know if we do if we do create when it was <unk> will be <unk> you know accomplish.
Okay fair enough. Thank you.
Great. Thank you.
[noise] I next question.
Morgan Stanley .
Except for now I guess.
<unk>.
I'm wondering if we could just you construct the guidance little bit here on on the margins sides. So on the on the U.S. It sounds like rates are holding up pretty well. So I'm just trying to bridge to there's a little bit of margin pressure it doesn't seem like.
Extensive.
Is that is that more related to fixed costs absorption, what what's what's driving the the pressure on margins there.
It's a little bit about got her it's a little bit of a slight rape pressure and then if we have lower activity covering the same fixed cost base will have a little bit of pressure on the <unk>.
Do you think it would be fair to say, it's 50 50 or you know just split of of what's driving that.
Yeah, I think that's fair.
Okay.
And then just as we think about next year, if if you were to.
You know high sixties, low seventies type activity levels should we expect that to continue to trend lower or do you think the cost offsets.
To market lower just trying to think through.
Eating edges versus what your realizing today.
So we haven't given any guidance for the the first part of next year, but <unk> kind of followed Kevin said about where we're having conversations with customers. We're not having very many conversations with customers about heading brags over the next two months. The conversations we are having her about adding rigs in in January and that is I'm going to be up like they can.
To be a different pricing dynamic than the spot market today.
Okay. That's fair, maybe one last one here.
Some of your competition retirement.
Just broadly across service industry that seems to be a theme. This quarter you feel about your asset base is there anything in there that you view as sort of non core or.
Competitive in in the current market.
So over the past.
Seven years, we've decommission about 200 rags across across our fleet. We have 22 regular help for sale right now that we will either sell or or decommission by the end of the year and if you look at our utilization rates in but the U.S. and in Canada, there right at the top of the industry in terms of.
Percentage. So we think that fleet, we have is well reflected our balance sheet and.
Obviously evident by by the customer demand.
Alright, Thanks, a lot.
They can't you.
Hi next question comes.
<unk>.
Hey, good afternoon, and thanks on that.
If my numbers or crack on the cap x. budget and it looks like you button in about 5 million for a few four and 2020 is still 60 to 80 million. So <unk>.
A lot of maintenance and some upgrade in there because you can help us parse how much of that and maintenance how much an upgrade and and 2019 it looks like you're spending around 30 million and maintenance. So it seems like there's a decent wage in there for upgrade I'm just curious what what sort of upgrade projects, they're contemplated in that budget deficits today.
Sure. So the the maintenance spend is going to be driven by activity that'll be in the low end if activities lower than this year it'll be on the high end effectively a little bit higher than what we experienced and 2019.
On the upgrade side will be looking at doing minor upgrades to rig so it might be increasing public capacitor or walking system. We wouldn't contemplate any major you know s. yard A.C. conversions and less the market improved a bit will also be you know Kevin and shoes, you both talked a lot about the success for having with our.
Technology initiative, and if we commercialize this year, which we're confident that we will will likely be adding additional process automation control systems to our Super Triple fleet, and 2020 and that'll comprise some of the upgrade expenditures.
Okay got it.
I guess just to clarify on on the some of the pricing comments you made it sound like at least for the S.T. 1500 that are.
Getting extended with their existing operators pricing pressures is is really nonexistent or not that great.
You think about your rig count potentially ticking hiring Q1, I suspect that some of those rigs it might be training hands into different operators and the pricing pressure there. Even if those are term contracted it is going to be a little bit grader and so I guess the question in my characterizing that correctly and if so at some point down there.
Do you think that delta between regs getting extending with their current operators and and kind of the new leading edge rate or 2020 start ups convergence moving forward.
You know Taylor I think [noise].
I think it's more complicated than just the current leading edge spot market rate becomes a starting point in a <unk> a market or you know even a nominal growth market.
I think we demonstrated that with some of our renewals this quarter that we're still holding of the previous pricing range of the mid twenties.
My My my answer to my short answer is it's really hard to define price realization recounts or softening.
Drilling budgets are winding down no new opportunities are emerging.
When you're into a new market, which is a sort of the new year with the new drilling budget and the activity is stable and likely rigs are m- recounts moving up slightly you're in a bit of a growth market.
<unk> will be different utilization of those <unk> upper upper eighties and disciplines been quite strong across the top $4.
So you know I'm not going to give any hard pricing guidance on q. on pricing right now, but we believe it will be constructive.
Okay fair enough I'm trying to squeeze when we're in a top ISTAT on on the pack system, you don't <unk> break even at around 70% pure customers that's pretty interesting.
To make sure I understand what that means I assume utilization is just the number of well they're dealing with the tax system during the quarter, but but from a revenue perspective to break even are you using the phone 1500 dollar a day type day rate for the pack system to come to that calculation.
Yeah. So what we find is that if they use the pack system on any given wells, 70% of the time.
And we charge the full commercial raid they will recover that 70 per cent utilization in savings.
On the Rick.
If if they can use at a higher percentage of the time. So you know we get criticized for letting all the value on our technology flow through to our customers. We've been very disciplined here to make sure that we capture the value up to a point and then and then we sharing the volume not putting forward.
Okay, I appreciate things and answers.
Thank you.
Thank you.
Our next question.
<unk>.
Okay.
Afternoon, guys just had a couple of here one of the follow up on counters question about the margin profile in four q.
In the U.S. you know the 400 800 declined margin is there any offset there from revenue from the P.A.C.'s systems or from AP revenue like if if absent those two things with margin be lower right how's away to think about that.
So.
Kevin and choose your both pointed to a us being confident that we're going to now it's full commercialization before the end of the year maybe have it in the next month or so.
And at that point, we will start getting more significant revenue from the system, which will show up much more to one than it willing to four but there's a little bit of an impact and thank you for.
Okay. Thanks.
And then on the.
Coming you were mentioning that that there's some tendered activity on the international side I know you have some idol rigs abroad. If if you weren't going to be able to put any of those risks to work. In 2020. You said you already have scale in the middle East <unk> what any.
I don't ring speed Divesture candidates.
You know, we don't have any kind of a formal decision to those rigs whether it's all them or not we did sell rigs in Mexico earlier this year and it was a good transaction for us.
The assets that we have been Kurdistan in Georgia, or and Saudi Arabia or excellent assets.
You know is the right for the right trade I didn't think is for sale.
Sure.
Thanks.
Great. Thank you.
My next question.
<unk>.
Thank you get afternoon.
Hey, John John .
<unk> quick follow up on on G.B.'s question. Appreciate if we should hold tight in here more later, but could you help us think about what the revenue uplift from the full commercialization of P.C. might be in Q1.
So I can tell you what we the guidance would give them before there's $1500. A day on you know roughly 30 systems that would be commercial and the field. So you can you can think about that as having an impact if you want.
And that's that's going from zero in Q4 minimal and Q4 to that type of figure in one cues that.
<unk>.
So we haven't given any any color and what that impact would be into four because we haven't announced Paul commercialization yet.
Okay.
<unk>.
Kevin you made some commentary on helpful commentary on the rate environment.
Well to well rigs.
Receiving lower rates relative to some others.
Does the percentage of rigs that a percentage of precision rigs on welfare <unk> work does that increasing queue for that part of the the Martin decline or not at all.
I don't have the tables in front of me, but essentially the contract to raise are kind of holding steady and it's the walls are over x. was but a little bit of pressure on raids.
Ah.
And the recounts come down a little bit so, it's probably well dwell rigs.
Right.
I don't I don't have the mixing probably okay. Okay. I was trying to think towards 2020.
Would have more well the wild type of rigs.
2020 minutes, that's fair Yeah. So I think that's I think it's fair to think that we wouldn't have more more wealth well written Q4, and certainly with all the uncertainty the market customers have not been.
Anxious to book up rigs for 2020, yet we did announce eight contracts, but I'd expect to see more contracts emerge in the first quarter.
Yeah right Okay. That's.
<unk> or certainly after budgeting season, even this fall you could you know later this later this year.
Okay.
Lastly on the on the international front.
Incremental during the third quarter should should we be thinking about a.
Four q. since you won't have that.
Limit type expense.
Yet I completely full color from that.
Q, which I think has a higher revenue per day relative to send me your other international.
So so John on cute too, we said that we would get a full full quarter of you <unk> from the new rig and Q3.
So we wouldn't expect to see an uplifting queue for that's our six rig deployed to that country and the same customer and it's the same rate design. We didn't have they have any startup cost in the corner that were unique to.
Did that start up.
Got it okay. Thanks, guys I'll turn it back.
<unk>.
Thank you.
<unk>.
After and everyone.
Hi, and.
Respect to grow from U.S. recounted.
The next year I mean, do you expect that will be continued market share capture or do you think it's part of a broader would count recovery.
I think there's I think there's a recount recovery I'm not sure I'd call. It brought her but there will be a recount recovery in next year.
I think it's gonna be driven by our customers trying to drive to more smooth loading over the course of the year.
The point is you know ramping activity up in the first off and rubbing it down the second half is very expensive way to drill wells.
You can love with all during the year that saves our customers money, along with Pat operations and technology and things like that so I think.
You know you'll see the recount check up from the trough of 2019 into whatever the levels going to be on 2020.
Sort of whether that's 30 or 40 rig something it's hard to say I would bet that every single <unk> is a super spectra precision Super Triple type <unk>.
We've done quite well during the objects in grabbing market you're on those <unk>. So I think our gains.
Through a slight uplifting the industry and.
And some market share destruction would take will gain.
Okay.
Leveraging is obviously been an important part of the story over the last number of years I mean, when you located Q3 actually I mean, you provided some context around we're working for it looks like.
<unk>.
You may or may not be able to meet that 100 150 million debt reduction targeting 2020 based on what you've seen so far.
Maybe because I'm recovering 2020.
We have a high degree of confidence will meet our targets in 2020.
Okay, Yeah, and and and I could walk through a couple of numbers. There are many we get guidance on interest expense, which we think will be right around 100 million, maybe a little bit less our cat backs of 60 80 million and cash taxes been relatively low we won't have much but change and working capital of activity similar so you're looking at.
170 million of a fixed costs. So take whatever you have for your yeah, but estimate and the difference would be our cash flow.
In addition to that if you look at our queue for outlook, we've given a relatively low cap x. number our interest expense for the quartering queue for will be $30 million to $35 million. We should have another very good cash flow quarter, and coupons and we've got almost $100 million occassional balance sheet today. So.
All of those things taken together I think we're very competent we can meet or exceed our target this year and.
While the same next year.
Okay.
That you know point out the we we did add the word exceed our target this year the disclosure this <unk>.
I did I didn't know that.
And then.
I mean, following I guess following on.
International Peace that was asked upon earlier.
Are you guys trying to just as you look look at those are you just trying to carve additional work if possible in areas that you currently operate in or would you be willing to step out.
Are you currently are further right opportunity should arise.
I'll give you a bit of a sensible looking out right now so the rigs we have the idol the middle East are looking to deploy likely somewhere in the middle East in one of the countries. We're currently operate.
I think that's there's no step out envisioned in the middle East Arabian Gulf.
But we are looking at some other opportunities that might involve redoubling idled North American ourselves to Latin America.
Okay. That's that's helpful.
The scale the scale would have to be adequate for us to make the decision.
Ah, but we're exploring their approach is yeah, I would add that the scale would have to be adequate and the.
Capital expenditure requirements would have to be relatively low yeah.
Just one quick clarification, there and scale should I be thinking about that from a dollar asset perspective or is it.
<unk>.
<unk>.
The middle east much different.
America.
Yeah, I I would think about it as number Briggs okay.
Thanks, very much guys okay.
Thank you in.
Thank you again, if you like to ask a question. Please press start.
<unk>.
One on plant.
Next question concert.
See capital markets.
<unk>.
Can you just.
<unk> can you talk about the level of rig inquiry in the last four to six weeks and whether you see any meaningful change up or down in kind of that duration, obviously activity has been coming down and we all see that but I'm just trying to get a sense of whether there's any heightened level of R.S.P.'s in the market that.
Could be indicative of guys shopping around for price and perhaps getting ready to grind on contract criminals or or do you believe that that's fairly representative of what they're actually going to need in the coming period.
John is pretty easy for a sales team to parse through.
You know the guys in price discovery versus 2020, you know new opportunities. So I think that worked pretty Clara, which we're pursuing and most of what we're putting your energy into his around new opportunities and 2020 not price discovery.
Okay, and it's fair to assume that you're rate of renewal or hit rate is fairly steady with what you've seen over the past 612 18 months.
Are rid of renewal slowed down this quarter I mean, but this was the slowest quarter. This year for bookings for contract for contract with noodles and there's no no surprise the marketplace Nobody's looking to walk in a lot of rigs.
In the third quarter of 2019.
But those people maybe looking to do that late in the fourth quarter early first quarter as they think about a four year of drilling and 2020.
<unk> I misspoke I I meant your when rate hasn't really changed based on the number of things that you're betting on.
Oh, <unk> I don't look that closely when rate I'm pretty happy with the contracts we've achieved in the pricing we'd gotten.
No no we've walked away from contracts because the pricing wasn't adequate.
[laughter] that's helpful. Just in terms of Canada, Kevin some of your peers have been talking about cold sacking some of the heavy devils in the market do you think that that has a chance of actually improving pricing at the lower sparked part of the market or that just kind of reducing some of the pressure that machine.
John somewhat comments on the wall service business apply to the shoveled were part of the joint business to the the rates are too low for the industry. It's unhealthy food industry I think every drawing contractor that <unk> no stuck it stuck in that business.
Is trying to find ways to tighten the market.
Certainly.
If our customers wants to be healthy supply business, you have to be a little more flexible and pricing, especially on the <unk>.
No it's hard to maintain.
High quality offsets you know the the expectation for safety in Canada was quite high from Barbara we're supposed to lose quite high.
On the on the contracting industry for those <unk> do that but these rates. So my message is quite loud and clear our our customers have to work with us a little more than they have on the shallow rigs I can tell you. The drawing contractors are doing all they can just try to ensure the not wasting any any of their operating costs sort of calls docking rigs or.
Trying to be as smart as we can <unk> the industry is quite Brazilian but the richer too low.
Okay, but Kevin you've talked about being open in terms of a welcome well servicing consolidation in Canada in the past haven't made sense for precision to do it you wouldn't might not be the leader of doing it within the platform, but are you surprised that.
We haven't seen more consolidation not marking past 12 months because the conversations we would have with the private operators would obviously highlight.
Q distress send them surprised we haven't seen more things happen today is that <unk>.
Yeah, you don't hide from had my mind that buys into Q3 or Q4 2019, the business would have been through the ringer long enough to narrow some of that did ask spread.
Don't think it has and I still think that enough of the rigs are controlled by companies like precision that are probably doing.
<unk>, we're doing very good job they got to do an okay job and it's not.
Strategic in their business, yet, but it will become strategically <unk> if it stays.
Position so.
You can look at the act of industry right now.
I think probably 40, 45% of active service rigs are owned by drilling contractors.
Okay.
But but Kerry just in terms of the.
I'll finish off my point, though John I think the industrial logic and the economic logic is getting closer and closer to making sense.
I do expect that.
Suddenly started merging in 2020 and that Spanish.
It it always just takes longer than you would logically think for that time actually happen.
It does.
Mmm carry in terms of the Catholics guidance. He gave for 2020 would incremental inflation or deflation of those numbers just largely go in line with the number of drilling days, he actually cat and is there anything that would push it meaningfully above that.
In any scenario that you could for seeping logical.
If we're in a an activity range that looks you know plus or minus 10 or 15% from from this year, that's probably a pretty good range, but if we have a higher demand scenario that'll probably trigger some more s. yard A.C. conversions and the upgrade peace could.
Good creeped up.
But again, we don't get if we would need we've been either I contracts for.
It's been that money.
And it's it's a difficult to come up with any scenario, where we wouldn't they don't do it first.
Correct.
So basically the capital priorities the right way to think about it is one you're essentially maintaining the marketability of acid based too you'll meet at least the base debt reduction targets, he put out, but probably gonna exceed and three you really only lean on the buyback when you're very comfortable with the fact that you're going to achieve bucket wanting to when you've got access cash.
The right way to think about the N.C.I.B. at this point.
I I would also that is in general apps and any upgrade opportunities, but if we have upgraded opportunities that provide us a good return on our investment that would that would likely to take the place of my next year.
Yeah, and and those would be in line with your traditional metrics that you talk about.
Correct.
Perfect push the color alternate Buck.
Thank you John John .
Thank you.
So I know from the question at this time.
<unk>.
In closing remarks.
Thank you all for joining today's call and look forward to speaking with you when we report a fourth quarter results in February .
[noise] [noise] today's conference call.
You may now disconnect.
Yeah.